Initial Coin Offerings: Know the risks before you buy

ICOs (initial coin offerings) are an unregulated way to gather capital to finance a Startup. Given it is unregulated, there are risks associated with investing in an ICO. Since the issuance of such tokens is currently outside the scope of regulatory oversight, they are seen as a quick way in which tech startups can raise capital without all of the necessary requirements that would come with, say, an initial public offering in stocks.

The attractive feature of an ICO and what seems to be fuelling a lot of the recent flows is their speculative potential, and the ability to exchange the tokens for cash on many of the world’s cryptocurrency exchanges. If the coin is listed on an exchange after its initial offering, then the likelihood that its value increases grows considerably, therefore, it is an attractive and efficient investment, given the lack of regulation and process in place for an ICO.

Often the only chance of a return is if the value of the coins goes up, but with the examples of bitcoin (increase in value over the past 12 months: 410%) and Ethereum (increase in value: 4,000%), a lot of investors are prepared to speculate and take the risk. If the platform succeeds, those coins will rise in value, and they can cash in.

However, the risks for investors are sizeable. Despite the name, an ICO doesn’t share a lot of similarities with an IPO. ICOs carry a risk which stems from the complexity of the projects, the fact that these offerings are made before the company even really exists, investors lack of technical expertise to be able to evaluate whether investing in an ICO makes sense and inadequate information about the investment. Investor or contributors are not informed adequately regarding the business model, industry and therefore they are likely to misjudge the true opportunities and risks of a particular ICO.

Lessons for Investors and Contributors:

1. Find out everything you can about the development team
Look up their profile on LinkedIn. Where did they go to school, what University degree do they have? How long have they been in the industry for?

2. Read the ANN thread on BitcoinTalk.org

www.BitcoinTalk.org is a message board, where new alternative Crypto-currencies will usually have an Announcement [ANN] on the announcement message board. This is usually the best way to find the first announcement of an ICO, what the coin has to offer, propose questions with the developers of the coin and other BitcoinTalk.org members.

3. Read the Whitepaper
The Whitepaper provides information about the project and what it is about, how much money is needed to undertake the project, how much of the coins the developers will keep for themselves. Majority of ICO white papers request a contribution rather than an investment, have you ever wondered why? This terminology is used because investors have certain rights while contributors do not. Contributors provide a donation and not investment. Read every single page of the Whitepaper and pay attention to the terminology used throughout the paper.

4. Don't put all your eggs in one basket
As an investor you are familiar with this concept that you must learn to spread risk. Don't put all your eggs in one basket and invest in one coin thinking it is going to rise substantially.

5. Do your research
Be careful of information you read on message boards and do your own research.